Fitch Revises Cook County Forest Preserve, IL's Outlook to Negative; Affirms 'AA' GOs
Friday, May 30, 2014
Fitch Ratings has affirmed the 'AA' rating on the following Forest Preserve District of Cook County, Illinois (the district) general obligation (GO) bonds:
--$44.055 million GO bonds, series 2004;
--$26.455 million GO unlimited tax refunding bonds, series 2012A;
--$53.945 million GO limited tax project and refunding bonds, series 2012B;
--$55.2 million GO unlimited tax bonds, series 2012C.
Fitch has also revised the district's Rating Outlook to Negative from Stable.
The series 2004, 2012A and 2012C bonds are secured by a pledge of a direct annual tax unlimited as to rate or amount. The series 2012B bonds are secured by a direct annual tax unlimited as to rate, but limited as to amount by the provisions of the Property Tax Extension Limitation Law.
KEY RATING DRIVERS
SUBPAR PENSIONS; REFORMS REQUIRE STATE LEGISLATION: Pension-related pressures are the top concern driving the Negative Outlook. The district continues to underfund its pension liability based on a statutory maximum payment dictated by current state statute. However, Fitch believes the district is relatively well positioned to meet the actuarially required contribution (ARC) without tremendous budget stress. The size of the annual funding gap is manageable and the district's limited (and more discretionary) purpose support inherent spending flexibility. A new statute allowing for increased funding and benefit reforms was recently passed by the state senate and is awaiting further state approval.
HEALTHY FINANCIAL FLEXIBILITY: The district's financial profile is strong with robust reserve levels and ample liquidity.
LIMITED PURPOSE: The district's limited purpose enables it to focus on its core mission and responsibilities with a narrow scope of service delivery, allowing for greater expenditure flexibility than in most full-service governments.
STRONG REGIONAL ECONOMIC BASE: The area economy is broad and diverse, anchored by the city of Chicago.
MODERATE DEBT BURDEN: The district's debt profile is characterized by average principal amortization, limited future debt plans, and a moderate overall debt burden. The district's large carrying costs are not unusual for single-purpose capital intensive districts.
PARITY RATINGS: The ULTGO and LTGO ratings are the same due to the district's substantial financial flexibility.
PENSION REFORM: Fitch will assess within the year the impact of any pension reform for the district and other Chicago-area credits. Lack of meaningful solutions to both the near- and long-term problems presented by the poorly funded system would lead to a downgrade of the rating. Conversely, the adoption of a sustainable plan would provide rating stability.
The Forest Preserve District of Cook County was established in 1914 for the purpose of land conservation and has a tax base coterminous with the county (GOs rated 'AA-' with a Negative Outlook by Fitch).
DISTRICT BENEFITS FROM EXPANSIVE CHICAGO ECONOMY
The district is governed by the county commissioners but maintains independent taxing powers and is a distinct entity as a non-home rule unit of government. Land owned by the district encompasses 68,000 acres, approximately 11% of the county's land mass. The district is authorized to preserve a total of up 75,000 acres of open land.
The district's service area benefits from a broad and diverse economic base. It is anchored by the city of Chicago (GOs rated 'A-' with a Negative Outlook), a nationally and globally important business center which serves as headquarters to over 30 Fortune 500 corporations. The unemployment rate of 8.6% as of December 2013 is the same as the state level but above the national average of 6.5%.
UNDERFUNDED PENSION A GROWING CHALLENGE
The district funds its pension plan in accordance with state statute, which continues to be well under the ARC. This funding formula, coupled with investment losses, have led to a decrease in the funded ratio from 99% at the end of 2007 to 63% at the end of 2012 (assuming the district's 7.5% investment return rate).
The funded ratio improved slightly to 66% at the end of 2013 as a result of strong investment returns. Using Fitch's more conservative 7% investment assumption, the estimated funded ratio declines slightly to a below average 62%. This yielded an unfunded actuarial liability totaling $95 million or small 0.02% of taxable market value.
The ARC has been increasing rapidly over the past few years, from $2.8 million in 2007 to $10.9 million in 2013. The district's statutorily required contribution for 2013 was only $1.4 million or 13% of the ARC. While the district's fiscal 2012 contribution accounted for a moderate 2.4% of government fund spending, funding the full ARC would have equaled 11% of actual 2012 spending; fiscal 2013 results are not yet available.
Total carrying costs for full funding of the ARC, debt service and other post-employment benefits would total 30% of spending. Though this carrying cost burden is high, it is not uncommonly high for a district with a limited and capital intensive service nature.
PROPOSED REFORM AWAITING STATE APPROVAL
The district is working with the county to develop a new pension funding policy that will stabilize the plan's funding level and modify participant benefits. A plan is currently working its way through the required state approval process. Even if the plan is approved by the state, Fitch believes it will likely be challenged in the courts.
The proposed plan increases employee and employer contributions, including revising the employer contribution to have a floor of 90% of the ARC, though it will usually be calculated based on a statutory rate that the district expects will dictate contributions above the floor. The plan also lowers cost of living adjustments with a 2016 freeze built in, raises the retirement age, lowers the service accrual multiplier, raises the number of years included in the final salary calculation and creates a salary cap. Actuarial projections show the pensions 100% funded in 30 years based on the revised proposal.
The district's unfunded liability will remain a challenge to future operations until a sustainable funding plan is approved and implemented. Fitch believes that recent area pension reforms increases the likelihood of the district receiving approval of a new plan. The Chicago Park District recently received state approval to increase funding requirements and the city of Chicago is awaiting gubernatorial approval on its proposed plan. Fitch believes the district is well positioned to absorb an increase in pension costs, should it achieve reform, given its large fund balance position and significant expenditure flexibility.
AMPLE FINANCIAL FLEXIBILITY
Financial operations for the district have been consistently positive with annual surpluses since 2006. The district ended 2012 with a $4.7 million surplus in the corporate fund bringing its unrestricted fund balance to $41.9 million (equal to a robust 84% of spending). In 2012, as in prior years, the surplus was driven by conservative budgeting and unfilled positions. Had the district fully funded its pension ARC, 2012 would have ended with a deficit.
Property taxes are the primary revenue source at 80% of corporate fund revenues. Increases in the property tax are limited to the lesser of 5% or CPI. Financial challenges facing the district's overlapping entities such as the City of Chicago, Chicago Public Schools, and Cook County may limit the district's political ability to increase its tax rate. This risk is mitigated by the fact that the district's tax levy makes up only 1% of a resident's tax bill.
The district expects additional, smaller operating surpluses in 2013 and 2014. The district has attempted to more accurately budget in order to minimize expense variances, and has been increasing its headcount. A large outstanding and unbudgeted licensing agreement was recently settled, which should drive the surplus in 2014.
The district also maintains substantial reserves in other funds that could be called upon if necessary. Excess cushion includes $13.4 million of unrestricted fund balance in the working cash fund, which is used by the district to make temporary loans to other district funds, and $14.8 million in restricted fund balance in the bond and interest fund. Available reserves across all funds total 80% of 2012 governmental fund spending.
MODERATE DEBT BURDEN
The district's debt burden is moderate when measured on a per capita basis and as a percentage of market value, consisting mainly of overlapping debt. The district does not anticipate issuing additional debt as its 2012 issuance funded most of its major capital needs. An average 56% of principal is retired within the next 10 years.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors, Underwriter.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria